Friday, August 16, 2002

Rural banks get their slices

Erpenbeck's mortgages assigned from Peoples

By James McNair,
The Cincinnati Enquirer

        From as far away as Pikeville, Corbin and Middlesboro, bankers hungry for a slice of the big-city real estate development pie threw $30 million into what was Greater Cincinnati's third-biggest homebuilder, The Erpenbeck Co.

        Today, they can't get their money back fast enough.

        Brought together by Peoples Bank of Northern Kentucky in recent years, nearly 20 banks in Kentucky and Indiana took part in the loans to Edgewood-based Erpenbeck. The group includes two large institutions, the $2.5 billion-asset Community Trust Bank of Pikeville and the $1.2 billion-asset Farmers Capital Bank Corp. of Frankfort. Rounding out the group are small banks such as Bank of Corbin, First State Bank of Pineville and Community Bank of Southern Indiana.

        Banks in slow-growing rural areas often look to urban markets to make loans — and to make money. Erpenbeck appeared to be a good bet, and with assurances from Peoples' executives, the Kentucky and Indiana lenders jumped in. But when Erpenbeck collapsed in insolvency this spring, the bankers suddenly faced a lot of explaining to their boards of directors.

        Now that Erpenbeck and Peoples are both fading into oblivion, the out-of-area banks are putting Erpenbeck mortgages out of Peoples' name and into their own. In three instances, all in Boone County, Peoples formally assigned mortgages on Erpenbeck projects to the underlying lenders in July. One of those lenders, Community Trust Bank of Pikeville, went on to commence foreclosure proceedings against the owners of the homes that serve as collateral on construction loans that Erpenbeck never repaid.

        The banks assigned mortgages by Peoples include:

        Community Trust, now the owner of record of two Erpenbeck mortgages totaling $5.5 million. Made in May 2001, the loans are secured by mostly unfinished condominium buildings and lots in the Belmont Park section of the fashionable Triple Crown neighborhood south of Union.

        Bank of Corbin, which now has two Erpenbeck mortgages of $2 million apiece. Issued in November 2000 and on April 2 — a week after Bill Erpenbeck resigned as president — the loans are secured by three condominium buildings in the Sherwood Lakes development on Mount Zion Road. The borrower was Mount Zion Real Estate Development Co., an Erpenbeck affiliate headed by Glenn D. Feagan.

        The Middlesboro office of First State Bank of Pineville, assigned two Erpenbeck mortgages totaling $3.8 million. The collateral, according to the mortgage assignment, covers 14 condominium buildings in Sherwood Lakes. The loans were made in January 2000.

        Phone calls to Jean Hale, president of Community Trust; Timothy Barnes, president of Bank of Corbin; and Ray Sterling, executive vice president of First State Bank of Pineville, were not returned.

        Peoples Bank has agreed to sell its branch offices and its good loans to the Bank of Kentucky. The deal, subject to shareholder and regulatory approvals, would reduce Peoples to a shell company with cash and liabilities.

        Bank president Merwin Grayson said the mortgage assignments to the three Kentucky banks are part of Peoples' efforts to square matters. He said the $30 million in participation loans were recorded in Peoples' name because it serviced the loans for the distant banks.

        “You had the respected developer who had a capacity for needing credit, and these banks based credit decisions on his creditworthiness,” Mr. Grayson said. “A year ago, everybody was fighting for his business.”

        Mr. Grayson said a “potpourri” of collateral ranging from $70,000 condos to $350,000 houses and from empty lots to finished homes secures the loans. Appraisals are being done on the properties, he said, and the banks eventually will sell the projects and buildings to other developers. He would not concede that the properties would sell at a loss, in spite of their perception as distressed assets. Some of the properties, he said, are desirable on their face or are in market demand.

        “By breaking them down into smaller pieces, the projects will get finished, and, in the end, we'll know how they worked out and there'll be discussion about what we'll have to pay out,” Mr. Grayson said.

        Peoples is still in talks with the biggest of the participating lenders, Frankfort-based Farmers Capital Bank Corp., which spread about $16 million in Erpenbeck loans over nearly 10 of its affiliate banks. Much of its money went into the Steeplechase subdivision on Richwood Road in Boone County. Mr. Grayson said he thinks Peoples will reach a mortgage-assignment agreement with Farmers similar to that of the other banks.

        “They're in the process of being worked out,” Mr. Grayson said.

        Farmers CEO Tony Busseni did not return a phone call Thursday.


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